The European Commission today published proposals to revise the Markets in Financial Instruments Directive (MiFID).
The European Commission agreed to revise the directive in response to the G20 summit in September 2009, which discussed the need to improve the transparency and oversight of less regulated markets including derivatives markets – and to address excessive price volatility in commodity derivatives markets. While MiFID created competition between these services and brought more choice and lower prices for investors, shortcomings were exposed in the wake of the financial crisis, said the Commission. These proposals consist of a Directive and a Regulation and aim to make financial markets more efficient, resilient and transparent, and to strengthen the protection of investors.
The key elements of the European Commissions proposals include bringing increasingly important, yet unregulated, organized trading facilities (OTFs) into the MiFID regulatory framework. These are organized platforms, which are currently not regulated but are playing an increasingly important role. For example, standardized derivatives contracts are increasingly traded on these platform, said the Commission. The new proposal will close this loophole. The revised MiFID will continue to allow for different business models, but will ensure all trading venues have to play by the same transparency rules and that conflicts of interest are mitigated.
Furthermore, said the European Commission, an updated MiFID will introduce new safeguards for algorithmic and high frequency trading activities which have drastically increased the speed of trading and pose possible systemic risks. These safeguards include the requirement for all algorithmic traders to become properly regulated, provide appropriate liquidity and rules to prevent them from adding to volatility by moving in and out of markets.
The European Commission said that by introducing the OTF category MiFID would improve the transparency of trading activities in equity markets, including dark pools. Exemptions would only be allowed under prescribed circumstances. It will also introduce a new trade transparency regime for non-equities markets (i.e. bonds, structured finance products and derivatives). In addition, thanks to newly introduced requirements to gather all market data in one place, investors will have an overview of all trading activities in the EU, helping them make a more informed choice, said the Commission.
Deutsche Bourse said it welcomed the publication of the proposed amendments. We believe it will lead to safer, sounder and more transparent financial markets in Europe, thus contributing to the G20 commitment from September 2009, said the group.
Deutsche Bourse said it agrees with the EU Commissions proposal of mandatory trading of derivatives on OTFs, and improved trading transparency across a broad range of financial instruments including derivatives. Andreas Preuss, deputy CEO Deutsche Bourse and CEO Eurex added: As regards derivatives markets, we very much welcome the suggestions proposed by the EU Commission to extend pre- and post- trade transparency to derivatives, and to bring more derivatives trading onto organized venues such as Regulated Markets, MTFs (Multilateral Trading Facilities) and OTFs, thereby strengthening competition. The higher the degree of organized trading, the higher the likelihood that these products can be facilitated by central clearing and trading infrastructures and the lower the degree of systemic risk. In our opinion, the ultimate goal should be that all trading venues need to comply with MiFID market rules.
The International Swaps and Derivatives Association (ISDA) also welcomed the publication of the amendments: The overarching objective of the original MiFID framework was to further the integration, competitiveness and efficiency of European financial markets, and ISDA supports changes that build on that goal, including the introduction of a well calibrated post-trade transparency regime for OTC derivatives.
ISDA is, however, concerned that the European Commissions stance on organized trading of OTC derivatives goes well beyond the spirit of the September 2009 G20 commitment that OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate. In particular, the European Commission proposes certain restrictions on organized trading facilities that will hurt end user choice and market liquidity. These restrictions would, in essence, limit the types of trades that can be transacted on single dealer platforms and would adversely affect the ability of firms to effectively manage their risks, said the association.
Conrad Voldstad, ISDA CEO, added: OTC derivatives trade infrequently. For example, only 3,600 interest rate swaps are traded each day globally and only half of these are sufficiently standardized to be cleared. In all, we think less than 1,000 interest rate swaps will be traded in Europe on Organized Trading Facilities. Half of these may be interdealer trades and the balance will be divided across hundreds of infrequently traded contracts with different maturities. These trades depend on the ability of dealer firms to make markets, particularly given the large trade size of most interest rate swaps. If you want to protect end users ability to access these markets, then you need a suitable range of venues on which to trade; limiting what you class as an eligible trading platform for OTC derivatives is not a good move. By way of comparison, around 1 million orders are executed every day on the London Stock Exchange.
Over the next two years the proposals to revise MiFID will be reviewed and amended by the European Parliament and European Council. The timeline for Council and Parliament processes will not be specified until November 2011. The final adoption of MiFID revision can be expected for end of 2012/2013.
(JDC)